Doing nothing pays these days. At least that’s the case if you’re talking about cash that’s sitting in your brokerage account. The Federal Reserve’s rate-hiking cycle has had the pleasant side effect of raising rates paid on otherwise ho-hum fixed income investments. The 3-month Treasury bill is now yielding 5.3%, and banks have stepped up rates on certificates of deposit and online savings accounts to compete. Sallie Mae just hiked the rate on its high-yield saving account to 4.05%, while Bread Financial touts a 5.2% APY on its 1-year CD. US3M YTD mountain U.S. 3-month Treasury bill A few brokerage firms are getting into the game by raising rates on their cash sweep accounts – effectively a holding area where you keep money that’s waiting to be invested – but what you find will vary. Consider that Fidelity Investments is offering a 2.6% APY on its cash management account, but LPL Financial pays 0.45% on its insured cash account for clients with $300,000 to $500,000 in household value. “We’re in a 5% interest rate world,” said Greg McBride, chief financial analyst at Bankrate. “So if they are paying you half of 1%, they are taking your cash and either lending it out or investing it at a much higher rate and pocketing the difference.” Three considerations “A year or two ago, nobody really paid that much attention to rates on cash sweep accounts, but now that market interest rates have gone up so much there’s a much wider disparity,” said Amy Arnott, portfolio strategist at Morningstar Research Services. Further, some firms prioritize growing their deposits by enticing investors with higher yields, even if it comes at the expense of net interest margin. Robinhood Gold is offering its subscribers a 4.65% rate on cash, for instance. First, examine your goals for the money before you shop around for cash sweep rates. If this is an emergency fund, an online savings account might give you better yield and greater accessibility to your funds if you can link your checking account to it, according to McBride. “A money fund in your brokerage account is a great option for the liquidity you want to be able to purchase investments or jump into the market, but it may not be the best option for your emergency fund,” he said. Fees are also another consideration as you look for a place to stash your cash and determine whether a sweep account is a better alternative to a high-yield savings account. Second, think about whether you’re hands-on with your brokerage account. “The most important thing to keep in mind is not to forget about balances in cash sweeps,” said Arnott. Investors who don’t automatically reinvest dividends, for instance, might wind up with growing balances in their cash sweep accounts, but they still need to track what happens with those proceeds, she said. Finally, if you do pile cash into your sweep account, think about the tax implications of doing so. In taxable brokerage accounts, the interest you collect on cash is subject to taxes – and at the same rates as ordinary income, which has a top marginal tax rate of 37%. Some firms offer different options for investing your cash sweep account, including a municipal money market fund for investors who reside in high-tax states. Interest from muni funds are exempt from personal income taxes, while some funds – like Vanguard’s New York Municipal Money Market Fund (VYFXX) and California Municipal Money Market Fund (VCTXX) – are exempt from federal and state income taxes for residents of those respective locations. “Cash sweeps are an administrative detail that people don’t spend a lot of time thinking about, but it’s good to remember that your interests aren’t necessarily aligned with the brokerage firm,” said Arnott. “So it’s worthwhile to shop around.” – CNBC’s Michael Bloom contributed to this report.
